Credit Reporting: What Role for the State? Miriam Bruhn (DECFP), Subika Farazi (FPDCE) Martin Kanz (FPDCE) 1 Global Financial Development Report (GFDR) Seminar

Why credit information matters – Why share credit information? (i)Risk-management and prudential regulation asymmetric information (ii)Promotion of credit discipline moral hazard Credit information and the crisis – New focus on credit information sharing for risk-management and prudential regulation – Need for comprehensive credit reporting. Identify barriers to the entry of smaller players, non-regulated financial institutions (important rapid growth of consumer finance in emerging markets)Introduction Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 2

Evidence on the real effects of credit reporting Reduced default risk, lower interest rates (Padilla and Pagano, 2000) Improved financial access (Galindo and Micco, 2010, Brown et al., 2009, Love and Mylenko, 2003, and Galindo and Schiantarelli, 2003) Improved stability of banking sector (Houston et al., 2010, Simovic, 2009) especially important in rapidly growing consumer finance markets Credit reporting and financial access Reputational collateral for marginal borrowers (Miller, 2003) Inclusion of non-regulated lenders (NBFIs, MFIs)Introduction Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 3

Today How is the performance of credit reporting institutions affected by the degree of competition and concentration in the banking sector? Policy implications: what role for the state? – Transparency in credit reporting is closely linked to bank structure – The state can play a useful role overcoming market failures and coordination problems arising from bank concentration – Smart regulation needs to provide incentives for transparency where the market does not provide them (increasing social returns to scale) -- Where registries and bureaus coexist their roles should be distinct and non- overlapping to realize economies of scale to avoid crowding out -- Support extension of credit reporting to non-regulated institutions, lower bar -- Set and monitor standards for the type and quality of information providedIntroduction Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 4

1.Introduction -Why credit information matters 2.The challenge of building transparent credit reporting systems -When and why the market may not do it -Bank concentration and credit reporting - What role for governments in credit reporting? 3.Empirical overview - The nature and reach of credit reporting systems - Bank concentration and credit reporting 4.New Evidence 5.Policy implicationsRoadmap Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 5

Monopoly rents in the market for credit information – Banks (especially large banks) can capture monopoly rents and prevent entry by not sharing information – Increasing social returns of credit information sharing (Japelli and Pagano, 1993, 2002) – …but decreasing private returns of credit information sharing – Coordination problems in information sharing among private lenders Implications – Mere existence of credit reporting institutions may not be enough; underlying bank concentration matters (closed user groups etc) – Especially important barrier for the extension of credit reporting to non-regulated/nontraditional lenders such as MFIs and NBFCs Problems in credit information sharing Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 6

The role of the state What role for the state? – Public good character of credit information sharing may justify involvement of the state Role of the state (i)Regulator (ii)Promoter (iii)Operator of credit information systems What should be the objective? – Fix market failures (coordination problems among private lenders) – Realize economies of scale where the market does not provide the right incentives (lower barriers of entry for smaller players NBFCs, MFIs) – Set data quality and reporting standards The role of the state Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 7

How does bank concentration affect credit reporting? (i) Emergence of credit reporting institutions (ii) Institutional participation in credit reporting (iii) Extent of information collected and distributed Can state involvement help? Are there complementarities between public and private credit reporting? Countries with low bank concentration Countries with high bank concentration Credit Registry? Credit Bureau? Credit bureau or registry? Bank concentration and credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 8

Institutional Participation in Credit Reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications Large variation in type of credit reporting institutions across regions Legal origin and credit institutions: Anglo-Saxon countries typically stronger creditor rights, less state involvement 9

Institutional Participation in Credit Reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications Different ways of measuring the coverage of the credit reporting system Financial stability: volume of credit listed Financial access: number of individuals covered 10

Institutional Participation in Credit Reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications Functional Differentiation Private bureaus collect more information from non-bank/non-regulated lenders Potential limitations of registry for risk-management in emerging markets with large NBFI share Strong case for private bureau if target is incorporation of MFIs, NBFIs 11

Depth of Credit Information Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications It’s not just ownership that matters… Variation in the type and quality of information collected Bureaus do more active monitoring… …and collect more repayment information 12

b= -.48, R 2 =.12 Bank concentration and credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 13

b= -.47, R 2 =.10 Bank concentration and credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 14

b= -.48, R 2 =.12 Bank concentration and credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 15

Pr[Credit Registry]=1Pr[Credit Bureau]=1 Probit Bank concentration **-0.502**-0.457**-0.529*** (0.220)(0.230)(0.275)(0.299)(0.226)(0.233)(0.203)(0.200) Per capita GDP **0.088** (0.037) (0.040)(0.053)(0.033)(0.032)(0.034)(0.038) Private Credit/GDP-0.003*-0.002* * (0.001) (0.002)(0.001) (0.002) Contract enforcement (0.106)(0.118)(0.133)(0.093)(0.096)(0.111) Creditor rights (0.042)(0.053)(0.036)(0.041) French legal origin0.601***-0.211** (0.098)(0.106) German legal origin0.348*** (0.079)(0.211) Transition legal origin * (0.193) (0.234) Number of observations R-squared Note: *** p<0.01, ** p<0.05, * p<0.1 Bank concentration and the emergence of credit reporting Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 16 Going from the 25% to the 75% percentile in bank concentration (from 56% to 89%) is associated with a 17 percentage point lower likelihood of having a credit bureau Countries with French and German legal origin are more likely to have a credit registry, but less likely to have a credit bureau, compared to countries with British legal origin

Results remain unchanged when using an instrumental variables strategy with the following instruments for bank concentration and institutions (i.e. creditor rights, contract enforcement) – Banking applications denied – Legal origins – Region Second stage First stage Robustness check: Instrumental variables strategy Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 17

Credit listed/GDP, credit registryCredit listed/GDP, credit bureau OLS Bank concentration *-0.444* (0.152)(0.163)(0.217)(0.245)(0.289)(0.260)(0.293)(0.346) Per capita GDP *0.070*0.068* (0.031)(0.032)(0.038)(0.039)(0.056)(0.057)(0.071)(0.090) Private credit/GDP (0.002) (0.003) Contract enforcement *0.252* (0.078)(0.090)(0.094)(0.107)(0.124)(0.149) Creditor rights *0.056 (0.036)(0.037)(0.047)(0.040) French legal origin0.319*** (0.113)(0.223) German legal origin0.515** (0.240)(0.236) Scandinavian legal origin-0.343** (0.159)(0.307) Transition legal origin (0.116)(0.197) Constant *-1.545* *-1.704* (0.242)(0.584)(0.763)(0.797)(0.429)(0.646)(0.970)(1.025) Number of observations Adjusted R Note: *** p<0.01, ** p<0.05, * p<0.1 Bank concentration and the reach of credit reporting institutions Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 18 Higher bank concentration is associated with a lower volume of credit listed in the credit bureau

Credit registryCredit bureau OverallPersonalLoanRepaymentOverallPersonalLoanRepayment OLS Bank concentration *-0.420* (0.134)(0.138)(0.171)(0.178)(0.182)(0.176)(0.209)(0.228) Contract enforcement *-0.075*-0.081* (0.057)(0.059)(0.068)(0.073)(0.096)(0.094)(0.108)(0.134) Creditor rights (0.020)(0.021)(0.026) (0.030)(0.029)(0.031)(0.040) Per capita GDP *0.106* (0.022)(0.023)(0.026)(0.028)(0.027)(0.026)(0.035)(0.034) Private credit/GDP * (0.001) Crisis *** (0.055)(0.056)(0.065)(0.077)(0.064)(0.063)(0.075)(0.077) French legal origin ** (0.057)(0.064)(0.070)(0.069)(0.074)(0.071)(0.087)(0.097) German legal origin ** (0.074)(0.070)(0.089)(0.110)(0.095)(0.088)(0.116)(0.128) Scandinavian legal origin (0.087)(0.088)(0.108)(0.115)(0.124)(0.151)(0.118)(0.157) Transition legal origin *0.130* *-0.022* (0.114)(0.116)(0.148)(0.147)(0.149)(0.140)(0.172)(0.180) Constant (0.456)(0.458)(0.550)(0.616)(0.803)(0.761)(0.926)(1.085) Number of observations Adjusted R Note: *** p<0.01, ** p<0.05, * p<0.1 Bank concentration and the quality of collected credit information Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 19 Higher bank concentration is associated with a lower quality of the information collected by the credit bureau

Credit registryCredit bureau OverallPersonalLoanRepaymentOverallPersonalLoanRepayment OLS Bank concentration *-0.383* (0.123)(0.135)(0.146)(0.167)(0.169)(0.185)(0.195)(0.225) Contract enforcement *-0.062*-0.056* (0.057) (0.062)(0.073)(0.090)(0.094)(0.104)(0.132) Creditor rights (0.020)(0.021)(0.024)(0.025)(0.028)(0.029)(0.030)(0.040) Per capita GDP *0.104* (0.021)(0.022)(0.023)(0.026)(0.025)(0.027)(0.033)(0.034) Private credit/GDP * (0.001) Crisis *** (0.052)(0.056)(0.059)(0.075)(0.060)(0.069) (0.075) French legal origin ** (0.058)(0.066)(0.067)(0.069) (0.073)(0.080)(0.095) German legal origin ** (0.071)(0.070)(0.079)(0.105)(0.090)(0.092)(0.115)(0.129) Scandinavian legal origin (0.088)(0.096)(0.099)(0.111) (0.133)(0.114)(0.148) Transition legal origin *0.127* *0.034* (0.113)(0.120)(0.129)(0.140)(0.145)(0.139)(0.166)(0.185) Constant (0.450)(0.447)(0.501)(0.606)(0.746)(0.780)(0.862)(1.061) Number of observations Adjusted R Note: *** p<0.01, ** p<0.05, * p<0.1 Bank concentration and the quality of distributed credit information Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications 20 Higher bank concentration is associated with a lower quality of the information distributed by the credit bureau

Registries and bureaus: Credit registries and bureaus: complements or substitutes? Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications Some anecdotal evidence of crowding out Bosnia and Herzegovina: public registry has no cutoff Source: Doing Business and Mylenko

Credit registries and bureaus: complements or substitutes? Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications Credit bureau Exists=1 Credit listed/GDP Institutional participation Information collected ProbitOLS Registry= **-0.249* ** (0.411)(0.127)(0.059)(0.067) Bank concentration-2.191** **-0.334** (0.975)(0.336)(0.168) Contract enforcement * (0.509)(0.150)(0.067)(0.092) Creditor rights * ** (0.188)(0.042)(0.028) Per cpita GDP0.351** ***0.058** (0.147)(0.087)(0.022)(0.027) Credit/GDP ** (0.008)(0.003)(0.001) French legal origin (0.475)(0.180)(0.071)(0.081) German legal origin (0.635)(0.201)(0.087)(0.096) Transition legal origin-1.066* (0.646)(0.198)(0.100)(0.141) Scandinavian legal origin ** (0.305)(0.128)(0.123) Constant (4.001)(1.067)(0.566)(0.749) Number of observations R note: *** p<0.01, ** p<0.05, * p< Evidence suggests credit registries may crowd out credit bureaus

Credit registries and bureaus: complements or substitutes? Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications Credit bureau Exists=1 Credit listed/GDP Institutional participation Information collected ProbitOLS RegistryXConcentration **-0.717** (0.428)(0.751)(0.282)(0.292) Registry= *-1.302**0.391* (0.291)(0.579)(0.202)(0.203) Bank concentration-0.862**-1.297* (0.370)(0.682)(0.247)(0.215) Contract enforcement * (0.092)(0.148)(0.064)(0.093) Creditor rights * * (0.033)(0.043)(0.027)(0.028) Per capita GDP0.065* **0.057** (0.035)(0.085)(0.023)(0.028) Credit/GDP ** (0.001)(0.003)(0.001) French legal origin (0.093)(0.183)(0.072)(0.083) German legal origin (0.200)(0.214)(0.081)(0.098) Transition legal origin (0.247)(0.218)(0.105)(0.144) Scandinavian legal origin **-0.306** (0.293)(0.135)(0.121) Number of observations R note: *** p<0.01, ** p<0.05, * p< But: existence of a registry may also help break banks’ information monopoly

Policy implications Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications Transparency in credit reporting matters – Financial access and inclusion – Financial stability and prudential regulation Degree of state involvement varies – …but it’s not only the ownership of credit reporting systems that matters Promoting credit information cannot be isolated from credit market competition more broadly Bank concentration also determines quality of credit reporting – Smart regulation needs to understand concentration of the banking sector – Private credit reporting may not emerge without state intervention if bank concentration is high Country examples: market failure, capture of credit reporting systems by small number of banks if bank competition not taken into account 24

Additional research Introduction Roadmap Background Evidence: Bank Concentration and Credit Reporting Policy Implications Would like to study how different types of government interventions can promote the emergence of a private credit bureau when bank concentration is high (i)Regulation (ii)Mandatory information sharing Currently do not have good cross-country data on credit information regulation… …suggestions for data sources and additional research questions? 25